Q4 2020 SPX Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing borrowing book into the Q4 and full year SPX Corporation earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session need to press star one on your call.
Zone, if you require any further assistance. Please press star Zero I would now like duty Associates Conference call, Mr. Paul Clegg, VP Investor Relations and communications you may begin Sir.
Thank you and good afternoon, everyone. Thanks for joining us with me on the call today are gene Lowe, our president and Chief Executive Officer, and Gene Harris, Our Chief Financial Officer.
A press release containing our fourth quarter and full year 2020 results was issued today after market close.
You can find the release on our earnings slide presentation as well on the link to a live webcast for this call on the Investor Relations section of our website at SPX Dot com.
I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks.
Replay of the webcast will be available on our website until March <unk>.
As a reminder, portions of our presentation and comments are forward looking and subject to safe Harbor provisions. Please also note the risk factors in our most recent SEC filings, including our disclosures related to the ongoing COVID-19 pandemic.
Our comments today will largely focus on adjusted financial results you can find detailed reconciliations of historical adjusted figures because their respective GAAP measures on the agenda for today's presentation.
Our segment reporting structure includes the results of our South African operations on the other category, which is excluded from our adjusted results.
Please note that our heat transfer operations, which were previously reported with the South African operations are now being reported as discontinued operations as they have been.
Fully wound down.
Table showing the restated other segment for the quarter was 2019 and 2020 is available in the appendix for today's presentation.
Our adjusted earnings per share also excludes non service pension items amortization expense intangible asset impairment charges and investment gain certain favorable discrete tax items and one time costs associated with acquisitions.
Finally, we will be conducting virtual meetings with investors over the coming months. We will also we also anticipate conducting a virtual investor day in late spring, where we intend to provide an overview and update on our value creation strategy and key initiatives and with that I'll turn the call over to gene.
Thanks, Paul Good afternoon, everyone. Thanks for joining us.
I hope that all of you on your families have remained safe and healthy.
On the call today, we will provide you with a brief update on our overall results segment performances for the fourth quarter and full year.
I will also provide 2021 guidance and our view of the key variables driving this year.
Now I'll touch on some of the highlights from the fourth quarter on the full year of 2020.
We had a solid performance on a highly unusual and challenging year.
On the thank our employees who've done an outstanding job of adapting to very difficult circumstances, and despite the hurdles they faced bringing about numerous successes.
Finishing 2020 with year over year earnings growth, a stronger balance sheet and positive operational momentum demonstrates the resilience of our businesses and the perseverance of our team.
For 2021, we are targeting double digit adjusted EPS growth. We also continue to gain traction on numerous internal growth initiatives and remain highly focused on the key value drivers of our success, including continuous improvement.
Vestments and digital and strategic acquisitions.
I am very excited about the year in front of us our opportunities and the ability to drive attractive growth in our earnings and cash flow for years to come.
In Q4 revenue increased modestly as acquisitions more than offset softer non residential HVAC sales and delayed project sales.
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Overall segment income was solid and in line with our expectations.
For the full year, we grew adjusted revenue segment income and net income on.
Adjusted EPS of $2 80 is an increase of four cents from 2019.
We did experience several unusual items in Q4.
One particular item was an increase in our estimated reserves for legacy product liability matters, which caused a decline in our operating income for Q4 and the full year 2020.
Excluding the charge full year operating income and margin were both up reflecting the strong operational performance of our businesses.
Jamie will discuss these items in more detail later on the call.
Overall, I'm pleased with their operation on financial performance and the positioning of our businesses as we move forward.
As always I'd like to touch on our value creation framework.
Our business system has been instrumental in supporting our ability to manage through the challenging environment, we have been experiencing over the past year.
In 'twenty 'twenty facing a worldwide pandemic our team continues to make safety a top priority.
Rapidly adapting and executing effectively on numerous initiatives, including the introduction of several new products.
Progress on continuous improvement improvement programs.
On several important investments in our people and our culture.
In addition, we closed two acquisitions, you will see robotics and sensors and software for a total of seven in the last three years and I am pleased with the pace of our integrations.
Our team's successes are reflected in our strong financial performance.
As we look forward to 2021 and beyond.
<unk> is very well positioned to continue our growth and value creation journey.
Our key initiatives include extending our continuous improvement processes across the organization.
Expanding our use of digital solutions to enhance our customers' experience and.
And building on the successes of our employee development and diversity and inclusion initiatives.
We also anticipate further opportunities to compound growth by employing our strong balance sheet to invest in attractive platforms in closely adjacent end markets.
We have multiple initiatives to further extend our digital capabilities with investments in new solutions for enhanced product configuration rapid quotes as well as additional on demand training modules and easier OEM parts identification and ordering.
With respect to our diversity and inclusion initiatives.
We believe our emphasis on listening learning and simply doing more.
Our focusing us on the things that will be impactful.
We are leveraging the diversity inclusion council, which I lead.
Embassador program.
And several other training and education initiatives to ensure we create a culture of awareness inclusive behaviors across SPX.
We also look forward to further extending our talent management framework called rise by expanding opportunities for leadership development at all leverage levels of the organization as well as mentoring programs and community engagement.
And now I'll turn the call for Jamie to review, our financial results and guidance.
Thanks Gene.
To echo genes comments, we are very pleased with our results.
On a GAAP basis, we reported earnings per share of 58 cents for the fourth quarter of 2020 and $2 20 for the full year.
On an adjusted basis EPS for Q4 was 89 cents compared with 96 cents in the prior year.
Also on on adjusted basis, we grew full year EPS to $2.80 compared with $2.76 in 2019.
As gene mentioned net earnings include several unusual items below the segment income line that negatively impacts our adjusted EPS on a net basis by approximately six <unk>.
These items include adjustments to our balance sheet to reflect changes in our long term assumptions about legacy asbestos liabilities.
We had a non call it $4 million charge to operating expenses.
An additional $7.6 million charge included in non operating expenses.
We also had income associated with proceeds from insurance policies on former company executives.
And discrete tax benefits associated with favorable tax outcomes, including audit resolutions.
It's you'd explorations and other items.
We do not anticipate material changes on our ongoing use of cash our overall cash generation as a result of these unusual items.
To maintain consistency with past practice they remain in our adjusted results.
Despite the impact of these items and the challenges of the pandemic, we were able to achieve year over year EPS growth.
Turning to a review of our adjusted results for Q4 revenues increased two 5% driven by a four 5% increase from the acquisitions in our detection <unk> measurement and HVAC segments.
Organic revenue declined two 4% due to lower HVAC volumes.
Operating income and margin were negatively affected by the $94 million charge I mentioned earlier.
On a full year basis revenue increased approximately 2% as the impact of acquisitions more than offset a modest decline in organic revenue.
As a result of the charge full operating income declined approximately $3 million with a 40 basis point decline in operating margin is.
Excluding the charge for your operating income was up three 8% with approximately 20 basis points of margin improvement.
This slide gives you a view of our segments and a summary of the changes in year over year revenue and segment margin Q4 segment income decreased approximately $2 million in segment margin declined 90 basis points.
Due largely to a less favorable mix on our HVAC and detection and measurement segments.
Full year revenue grew 1.9% as a result for the acquisitions of UFC and sensors and software.
Performance of our engineered solutions segment, and our HVAC cooling international business.
We also had year over year growth in our Gen fare in Q2's businesses.
Full year total segment income grew $7 million with 20 basis points of margin improvement led.
Led by the strength and resilience of our transformer business. The strong operational performance of our HVAC cooling business and the acquisition growth within our location and inspection businesses.
We continue to see strength in our engineered solutions segment and a general recovery in several of our end markets.
Next I will walk you through the details of our segment performances.
Starting with HVAC for the quarter revenues decreased four 4%, including a 7.9% organic decline due to lower volumes and book cooling and heating.
Partially offset by three per cent benefit from having a full quarter of Patterson Kelley, which was acquired in November 2019.
As a reminder, our HVAC cooling business did have some sales pulled forward into Q3 from Q4.
The residential portion of our business was solid despite comparisons with strong weather driven results in the prior year non.
Non residential sales softened consistent with trends in the leading macro indicators, we observed earlier in 2020.
Segment income declined by approximately $4 million and margins decreased 130 basis points due to lower cooling volumes.
Our heating businesses, despite lower volumes reported similar segment income and margin to the to the prior year due to strong operational performance.
On a full year basis segment income and margin were up slightly about 10 basis points compared to the prior year.
As we entered 2021, we're beginning to see early signs of increased activity in non residential end markets. As you know we are seeing very cold temperatures across the U S, which generally bodes well for our heating business as.
As we continue to monitor these trends for the full year 2021, we're anticipating low single digit growth on our HVAC segment revenue and a modest increase in margin. This includes a view of higher heating sales and flat tooling sales.
In detection and measurement for the quarter revenues increased 17, 5%, including a two 6% organic increase resulting from strong year end shipments in our location on inspection and our aides and navigation lighting platforms.
The acquisitions of ULC robotics, and sensors and software contributed 13.9% growth.
And we experienced a 100 basis point tailwind from currency.
As a reminder, currencies, primarily a topline on translation issue for SPX due to the significant natural foreign exchange hedges built into our cost structure.
Segment income increased approximately $2 million, while segment margin decreased 160 basis points due to a less favorable mix associated with fewer project shipments from our communication technologies business.
As anticipated we did see shipments of slower moving projects. They were impacted by pandemic restrictions begin to move forward in Q4.
However, overall volume remained below the strong levels, we saw in 2019.
As the year progressed, we also saw a nice recovery in our shorter cycle <unk> businesses in Q4.
And believe that we are heading into 2021, well positioned to continue that positive momentum.
On a full year basis revenues increased modestly due to primarily acquisitions, partially offset by organic volume declines with location and communication technologies equipment segue.
Segment income and margin declined due to the impact of lower sales of these higher margin products.
For 2021, including the impact of acquisitions completed in 2020, we anticipate revenue growth in the low to mid teens and a significant increase in segment income.
We anticipate approximately flat margins due to a less favorable mix associated with recent acquisitions in their first year as part of SPX and some P&L investments in growth in our location and inspection platform.
As we continue to see project related revenue rebound and we fully integrate the U L see robotics in sensors and software acquisitions, we anticipate an increase in segment margin.
In engineered solutions revenue for the quarter increased one 3%, reflecting higher sales in both transformers and process cooling.
Segment margin decreased modestly with a strong operational and price and performance and transformers offset by less favorable sales mix in process cooling on.
On a full year basis segment revenue grew five 2% and segment income margin increased 270 basis points due to strategic pricing initiatives better pricing discipline, and a strong operational performance and transformers.
For 2021, we anticipate revenue growth in the low single digits and approximately flat margin with higher pricing and volumes in our transformer business, partially offset by lower process cooling volumes.
Anticipate offsetting higher commodity costs with pricing actions.
Turning now to our financial position at the end of the year.
Our balance sheet remained strong during 2020, we deployed $104 million of capital for two acquisitions.
We ended the year with a net leverage ratio of 1.6 Fabs.
Adjusted free cash flow for the full year was approximately $123 million, which translates into a free cash flow conversion ratio of 96%.
Over the last three years, the average of our conversion ratios had been greater than 100 per cent.
We anticipate strong cash generation again in 2021.
And any potential capital deployment for acquisitions, we would anticipate that our net leverage ratio will decline materially below the lower end of our target range, which is one five to 2.5.
For the full year, we used approximately $15 million of net cash associated with South Africa included the impact of the bonding dispute with Mitsubishi that discussed we discussed last quarter.
We feel good about the progress we have made in South Africa, and we will continue to focus on resolving remaining disputes with our counterparties. Despite.
Despite the impact of higher legal spend associated with the dispute resolution process, we anticipate modestly lower cash usage in 2021, as we have substantially finished with our scope of work.
Overall, we are very pleased with our strength of our balance sheet and we think it is a strategic advantage to us in 2021, as we pursue growth initiatives, both internally and externally.
Moving to our guidance.
For the full year 2021, we are estimating adjusted earnings per share in the range of $3 to $3 20.
This represents an increase of approximately 11% at the midpoint compared to 2020 adjusted EPS of $2 80.
On an adjusted basis, we are estimating revenue of approximately $1 6 billion and a modest increase in segment income margin from 15, 3% we reported in 2020.
As discussed on our segment overview, we anticipate revenue growth in each of our segments. We currently expect relatively flat margins in detection <unk> measurement and engineered solutions and modestly higher segment margins in HVAC and for SPX as a whole.
As always you will find details of other items driving our 22000 in 'twenty one guidance in the appendix of today's presentation, including our tax rate, which we currently expect to be approximately 21% to 23%.
While we do not provide quarterly guidance. We currently anticipate a similar earnings cadence for 2019, I will now turn the call back to gene for people to review a few of our end markets and his closing comments.
Thanks, Jamie.
Overall, we are encouraged by the trends we are seeing on our end markets as we progress through 2021, although we continue to closely monitor certain areas.
In HVAC, we previously noted year on year headwinds for the nonresident portions of our cooling and heating business.
Recently, we have begun to see early signs of increased activity in these markets.
Although somewhat uneven geographically.
Demand for our more residential focused boiler products appears stable and as always remains influenced by weather trends in the short term.
In detection and measurement locator demand has rebounded significantly across most regions.
Well, we've seen that demand can be sensitive to pandemic related lockdowns current trends remained healthy.
Inspection equipment, which showed solid demand for municipalities in 'twenty 'twenty has shown signs of flattening but remained steady.
And our project based D. N M businesses, we continue to see solid front log and customer interest.
While the impact of travel and access restrictions have not fully abated. We have seen forward movement on communication technologies orders that were delayed in 2020 and anticipate an improvement in this business in 'twenty and 'twenty one.
We continue to monitor these trends closely.
In engineered solutions, we are seeing encouraging behavior from transformer customers and solid backlog.
While transformers is a longer cycle business, we are well positioned to address opportunities for increased.
Investment in transmission infrastructure associated with potential renewable energy and grid reliability investments.
In summary, I'm very pleased with our solid performance in a challenging year.
The efforts of our employees on the strength of our resilient platforms helped us drive growth in our earnings during a worldwide pandemic.
This year, we anticipate a return to double digit earnings growth.
And remain focused on initiatives to accelerate that growth through organic and inorganic levers.
Continuous improvement.
Further investments in digital.
And initiatives focused on our people and sustainability.
For the strong balance sheet on a highly capable experienced team.
I am very excited about the opportunity ahead to continue driving value for our shareholders.
And now I'll turn the call back over to Paul.
Thank you operator, we are ready to go to questions.
Thank you as a reminder, ladies and gentlemen.
Question for press Star one on the telephone.
Until he joined question press the pound key.
At least on bodily compile the Q&A roster.
And your first question will come from the line of Brett Linzey from vertical research.
Again.
Hey, good evening, guys How're you doing.
Hey, Brian Hey, Brett of Garden.
Wanted to start with supply chain constraints affecting the whole industry. Obviously also price cost, particularly steel how are those two items informing the cadence of the year for for 'twenty one.
Should we expect a weaker.
First half in terms of profit with some recovery in the second half any any color you can provide on those two items.
Hey, this is Jamie I'll I'll kick this off.
So supply chain commodities in general we are seeing in tightening on certain products and supply chain. We are seeing some commodity price increases in certain spots in our company.
You know from a from a pricing standpoint, we think at this point in time that we're able to cover most of the commodity or the material increases through price.
We have taken actions on potential slot supply chain.
The shortages are constraints. If you will we're doing some safety stocks were making sure. We have good alternative supply choices to use and so right now we don't see that being <unk>.
Serial issue, but it is something that we're very closely monitoring.
But you know again, we are fortunate a lot of our businesses are very highly technical and specialized product and we're able to.
Pass that price through to the customer and in many cases not all.
Okay, Great and then on the cooling side just wanted to see.
Where the comments within early in early signs of recovery in the non res piece, but you're guiding flat for the year against relatively easy comps. So just conservatism something else, we should be considering there.
Hey, Brad for his gene the yeah, I think if you look at what we have seen.
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Last year, if you look at where the Dodge index was had a little bit of.
Downward impact on projections for 2021.
Latest projections, if you if you map out.
What were the Dodge is versus our end markets as a reminder, in non res.
Ari diversified wherein data centers health care commercial hospitals edgy.
Education, if you look at it I think the situation has improved and you know this the current Dodge index would probably have us at a plus.
Plus one maybe 2% according to the market demand with a little bit more coming in the back half of the year. So I do think it's been a little bit of positive change that we've seen in the market dynamics. So I think that is a fair point.
And just a follow up on the HVAC side, particularly on the heating side I mean, we're almost two thirds the way through the quarter have you seen the channel load in.
Given some of the colder weather conditions in your served markets or what's the.
Dynamic and kind of the early pulse here in the first quarter and heating.
Yeah. So I think if you look outside you know we have seen a lot of old impacts across the U S. Something we monitor very closely as heating degree days.
If you look at the data our heating degree days as our as positive versus last year, it's up nicely, but having said that it's actually lower than our normal averages over the longer term. So we are seeing.
On a positive versus last year, but a little bit lower than before but.
We think that that would set up a favorable comparison in Q1, and then obviously as you think about how that flows through <unk>.
Having a nice second half of the shoulder, let's say Q1.
It sets you up well as you go into the pre season in the off season. So we think net net.
The weather to date has been more favorable than what will be a positive for us this year.
Okay, Great I'll pass it along thanks.
The spread on scripts.
And our next question on Fine Bryan Blair from Oppenheimer, you may begin.
Thanks for giving guests.
Hey, Ryan.
In terms of your D. N M sales Guy and I was wondering if you could break out what the team's thinking in terms of organic sales carryover M&A and FX contribution to get to the low to mid teens range.
Yeah.
We are.
Sort of.
Low to mid double digits teens on D N M as a whole.
A large part of that will be there will be some organic growth in there.
A large part of that will be as a result of our U S. C acquisition in our sensors and software acquisition for boats, which occurred in the in the.
Fourth quarter September and November respectively of last year.
FX, we do have a little bit more.
We see on a little bit more.
Contribution from FX, I think it's less and less than two points, maybe between one happened to have FX.
But the majority or a large part of the of the game or the increase will be from the acquisition side of the house, primarily ULC because it was the larger of the two.
And in terms of the organic in terms of organic we are seeing a nice rebound.
And our shorter cycle businesses in particular location and inspection.
We saw that happen to begin to happen in the second half of 2020, we saw it accelerate a little bit more in Q4, and we are seeing it as we enter into 2021.
As we look at our communication technology business.
And that's obviously a project oriented business and it carries.
The profile, where there is a project shipment it carries high dollars in revenue on a large incremental margin contribution when it happens.
You know that business.
'twenty 'twenty was down rather significantly from where it was in 2019, we're seeing a very nice rebound.
And that in 'twenty and 'twenty, one we will not be back to the levels of 2019 and as you probably remember 2019 was what was the level at the top line in the segment income line that probably historic record for for SPX with that business.
So we're not there, but we are seeing a very nice rebound.
And then in our.
And our Gen fair business, which our transportation business.
We're seeing that.
Recover.
But also carries you know the run rate business is as we think is doing well that business also carries a characteristic of having a lot of big sales and so you know we're seeing good front log out there we are.
Also.
Projects have to execute.
And in terms of you know in terms of both of those businesses. It does involve working with governmental agencies and so you know we still see things moving positively along although they still you know it can be difficult at times, especially with people still on being in a remote environment, but all signs are positive there.
Okay very helpful color. Thank you.
And anything you can offer in terms of you all see and sensors and software on.
Integration trends et cetera cure.
Curious what accretion you're expecting from the deals in 2021.
Maybe more important how they're influencing aren.
R&D and product development across your businesses.
Well when I.
Take a crack at the first part of that and then I'll hand, it to Jamie on some of the accretion.
Feel really good about the businesses there are technologies.
And that would require there.
As a reminder, youll see robotics their core business is assist spot. This is the very very unique solution that only they have that goes into gas lines and can really remediate underground infrastructure in a way. They said no. One has been able to do we like that business is a good steady.
Business, it's a really good value proposition and so we've talked about that because that's a good amount.
But what we really like is they have an R&D business.
This is about a quarter of the revenue and in there is a number of different technologies that.
Typically you will see robotics will be solving a solution that has never been solved before for a end customer it could be an industrial customer could be utility could be.
A variety of end customers.
And what we're doing right now is we have a process, where we're going through this portfolio and we're focusing on a smaller number I think we're down to the top for technologies.
And we really like what we see now commercialization of some of these things does take some time.
You have to get some of these on a production ready environment, but on.
What I would say is there's always a little bit of a risk when you bring a company in and you really learn everything about it backwards and forwards and I would say net net we're feeling more positive about the technology that we've brought in to the company.
They're very strong obviously in robotics, but they're also very strong in AI and one of the solutions that they have that's already actually in bidding commercially it has to do with AI.
AI solution.
So it's still early there and theres still a lot more work to do but I actually think that day.
They are greatly enhancing our our technology.
Sure.
Capabilities in our detection and measurement area and as you know.
One of the things we like to talk about is our location and inspection business, which.
Two years ago was $95 million is now approaching $250 million run rate and they're all working on underground infrastructure and Theres a lot of sharing so you will see is already working with Qs, which is working with radio and we're seeing opportunities where we can help each.
Each other out either on the commercial sales side or on the technology side. So very encouraged there the other one sensors and software we like that business. As a reminder, that is a business that we've known very well.
We are basically resold their product as our name for many years. So it's a very long established product ground penetrating radar is a growing portion of the market a very important product line and we're very glad that that's under our umbrella.
And we actually see some areas for growth that's a relatively small one if you look at it I think they are in the neighborhood of.
$12 million, but.
Because we were selling 5 million I think the incremental was small maybe $7 million, but we actually see a lot of opportunities to significantly increase that being radio detection, where we're the global leader.
In the Americas, and Europe and in Asia, We have a channel that a smaller company that it was smaller technology companies just doesn't have and so one of the things we're really looking at is it.
Is expanding that so net net from the technology side and the integration side I've been very pleased to this specific question Jamie on what that means for.
For.
Let me share.
So generally speaking I think when we put out a press release about your L. C.
You sort of indicated that we would we were expecting to see a segment margin incremental result from DLC and once fully integrated and you know generally generally speaking, we see that as being year, two or probably 2022.
You know from what gene said the piggyback on the integration it is going very well.
Eight.
The R&D business is very exciting you have a business day on the scatter a nice U K business for nice U S business on what all.
I'll call more of a run rate business and then R&D really offers a lot of opportunity.
I think one of the things about this business just from a P&L perspective, it does carry with it a larger than normal amount of depreciation relative to our other dnm businesses and so when you look from the from the segment income margin to the EBITDA margin. It carries very high EBITDA margins EBITDA margins.
<unk>.
And so, but we see a 'twenty 'twenty two are rather large.
Good increase in our segment margin for this business.
On the sensors.
Sensors and software side.
I would think about that as gene said is smaller but think about that more as a product extension.
The necessarily a standalone acquisition, you know, we do integrate all of them into the SPX family. If you will but the sensors and software it becomes much more integral part of radio immediately because we're already doing business in transacting business together.
So not as meaningful in terms of the total P&L, but at much quicker integration process for us and Brian. This is Paul just one I'll throw in one modeling point here to help out the group.
The combined annualized revenue from sensors and software and from you all see together is somewhere in the neighborhood of $50 million.
In 2021.
On a combined basis, they were about $17 million, obviously, we only had them for a portion of the year.
Okay. All very helpful. Thank you.
And then one last one if I can.
How are you thinking about your M&A funnel in early 2021.
And what are the prospects for <unk>.
Getting some more strategic deals to come through you obviously executed a couple during the pandemic you're toward the low end of targeted.
Targeted net leverage so plenty of capacity.
Just wondering if you can speak to confidence in.
Further acceleration there this year.
Yeah, Brian I think it's a good point, what I would say is we're seeing activity increasing.
Obviously, you did the two acquisitions, we just talked about.
I I really am excited about you'll see robotics in sensors and software.
But having said that those were actually in discussions and 19 for actually.
They didn't come up during the Covid time, they were actually already in discussions with both of those businesses forehand. While we are seeing is more opportunities starting to pop up I would say, particularly in the past two to three months I wouldn't say that we're at a full normal run rate, but we are I'd say we're rapidly.
Getting to that point.
From what we're seeing I would say valuations seem consistent.
You know we've been very disciplined on valuations across our <unk>.
Cross for acquisitions.
Our average blended.
Value has been 10, and a half times pre money for.
Pre synergy and $8 five times post synergy. So we think that's probably still consistent with what we're seeing in front of us.
So I'm very optimistic about the opportunities opportunities we have in front of us what I would say is we see a good amount of opportunities in detection and measurement.
I'm very.
Very.
Good technologies very strategically relevant very good businesses.
But I would say probably a little more on the smaller side and then we've seen I'd say, a good opportunity set as well on the HVAC side, and then I'd say.
Probably more what I'd characterize as larger opportunities to us and larger to us might be anywhere of.
North of $75 million, and so, but you know where we sit today, we like the opportunities in front of US. We think we're in the early innings of building out our platforms. We've seen a as you know a dramatic shift in both our detection on our HVAC businesses.
We think theres a lot of runway to go there.
Got it thanks again guys.
Thank you thanks Ryan.
Thank you and once again Thats star one for any question Star one on.
Next question on top line of Damian Karas from UBS.
Yes.
Hey, good evening gene, Jamie and Paul.
How you doing.
Doing well thank you.
I wanted to touch back on your margin guidance for the year.
Just curious.
Particular D N M and engineered solutions Gotcha.
You guys are calling for kind of flattish margins there I know you called out potential.
M&A.
And in DRAM, but.
Apart from that I mean kind of what's going on with with margins that are with the underlying growth that you're expecting.
Youre not getting a little bit more operating leverage there and maybe if you could just clarify on your prior comment I think you said that kind of expect price cost to be more or less neutral.
But maybe if you could just kind of.
Parse out what your expectations are.
Yeah. This is Jamie I'll take that one.
So.
Couple of factors that really impact the margin on the D&S side, the largest for which is back to the project oriented businesses, specifically communication technologies for us make carries a.
A project is a large amount of revenue on a high.
Margins are very high contribution margin if you will.
We're seeing a nice rebound on that business from from 'twenty 'twenty, He was down rather considerably for 19.
So we are seeing a nice rebound there that being said we are also.
Other things going on in the P&L.
You know, we're making some what I call P&L investments here and there.
Things like.
We're putting some feet on the street and our location on inspection business to filling gaps and geography, we're doing new product innovation new product launch.
Marketing and you know to get it out in the marketplace and so those things while not really hurting margins. They are not improving it today as much as we hope and we believe it will see.
Next year in years down the road.
As Paul mentioned, a few moments ago that if you look at the guidance on.
On the incremental from the acquisitions I mean, it totals roughly.
Total of about 50 in total.
From about 17 last year, so that's incrementally up about 30 to 35 and so.
Margin that business does come in in year, one primarily you will see in year, one of the acquisition a little bit lower than what our overall segment margins. So it begins to dilute if you will the rebound that we've experienced from the communication technology.
And then sort of a flattish type guidance.
Again, we are still very.
Very bullish on the DNA and we think it's a <unk>.
Great platform for us to leverage our business off of we have many different directions. We can go in and we do expect these margins to go up.
In outer years, and we think the investments, we're making today and the actions we're taking the day will be a big part of that on.
On the engineered solutions side, you know different business profile as you will know.
What we saw in engineered solutions in Q4.
And relative to all of 2020, you saw 2020 that I think had margin improvement of 270 basis points.
From about seven eight up to two five.
In the fourth quarter, though you saw it but more of a flattish.
And if you go back to 2019 Q4 that was the first quarter, where we the company had seen some of the strategic pricing and some of the operational improvements really one of the first places it see I really have taken hold in the company began to show through in the P&L. So when we got to Q4 2020, we began to cycle.
And much much different P&L profile from prior year in Q4, and so we're still very very high on that segment.
The engineered solutions, obviously in 2020 performed with.
Great resilience, especially on the tough economy.
But I think from we see next year in the flattish range, we actually see transformers being up slightly our process cooling because of some service mix, probably down slightly that average that out to a flattish kind of guidance.
But overall, we're still very high and very optimistic about that.
Okay got it.
Makes a lot of sense.
And I guess sticking on engineered systems and Transformers.
Gene I was wondering.
You know what some of the current issues.
That we're seeing and hearing about kind of mean for the business.
Thinking about what's going on down in Texas with the outage situation down there.
Also if you think about the automotive world and really hearing about when it could.
Celebration on these EV platform intentions.
Going forward, obviously that means theres got to be some charging station build out.
When you think about all of that are these things that start impacting your business sooner rather than later or.
He is the right way to think about transformer still it's basically kind of this.
A long cycle replacement.
Story, well, what's the trajectory when you think about that business.
Yeah, I think Damian I, if I look at where that business is I actually feel really good and I think the point you bring up are really relevant.
If you just kind of start with.
The operations of the business and where it's been.
The the team has really done a great job driving.
Continuous improvement driving strategic.
Pricing I think it's just a much healthier business you know it's in a leadership position and has a very very strong place in the market.
And it is a long lead cycle business. So you know you typically start a year with somewhere in the neighborhood of three quarters of the orders in your back pocket already so you're really booking in the second half, sometimes Q4, sometimes even the year after.
In some occasions.
You know I think the team has really built a strong foundation there and it is a really strong business.
We've also been able through Ci, which has opened up capacity to grow.
And they've had some some nicer growth than the market.
For the past two years and I think the points that you bring up are very real.
I think the question would be if timing I do think there are some mega trends that are very very real.
Rectrix vehicles, obviously, you're going to be very real.
General Motors is getting out of.
Internal combustion engine tried and there will be a shift and that will drive more generation and whenever theres more generation, particularly if it's renewables that drives our T&D demand.
And at Youre right. The bulk of our business has been replacement because there is such a large aged infrastructure, but if you see.
More.
If you look overall in the U S. There has not been a lot of growth in <unk>.
Energy usage over the past couple of years, but there are some things that could really drive that like EV.
<unk> data centers.
An upgrade of the general infrastructure and I, absolutely do think those could be positive drivers over time I think that those.
You know have a set.
<unk> had a very positive table looking forward you know.
What could impact us in the short or medium term.
If there are infrastructure bills and I know, there's still a lot of discussion about.
If and when there'll be an infrastructure bill on what that would look like you typically see a good amount of T&D and those bills.
Or if there's investments in renewables or investments in more generation that would I would say drive incremental demand and provide more opportunities for growth for where transformative. So yeah. I do think everything is highlighting is real.
And will happen and its more a.
A question of timing of when that will happen, but we feel good about the transformers business actually think the performance of the Transformers business.
You know last year was a very challenging year.
Team really did a great job, Brian Mason and the team there is really a.
A strong team and we like all day.
He really strength in that business have really put good foundations underneath there.
Well certainly be interesting to see I appreciate the thoughts I'll pass it along.
Thanks, Damian Simon.
Thank you.
I'm currently not showing any further questions in the queue I'd like to turn the call back over to speakers for any closing remarks.
Okay, well. Thank you all very much for joining us for this call. We look forward to updating you at our Investor day in late Spring and then next quarter again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
This growth.
John.
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John.
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